NFTs and the environment Part 1

By Brand Heeler

Can NFTs ever be green? Some initial thoughts

In recent years, blockchains have been accused of imposing an unsupportable burden on the environment. The energy needed to operate Bitcoin alone has been compared to the national requirements of a small country. Does this mean your new NFT artwork is killing the planet? Is your digital pride and joy actually a badge of shame?

Blockchains are often mentioned in the same breath as Bitcoin as if they were interchangeable. They are, of course, very separate concepts: blockchain is the underlying technology of which Bitcoin is merely a specific implementation (albeit the first and most prominent). But they’ve been together from the start, so what’s true of Bitcoin is sometimes taken as being true of all blockchains. However, as this article will discuss, that is not necessarily always the case.

At its simplest, a blockchain is a dataset which can be added to but not otherwise modified. Each set of entries (‘blocks’) on the blockchain is cryptographically secured to the blocks immediately preceding and succeeding it, in much the same way as a row of knitting is secured to the rows immediately before and after it. Just as a row, once knitted, cannot be altered without unpicking all subsequent rows, so a block, once committed to the blockchain, cannot be edited without altering all subsequent blocks.

Bitcoin is a specific cryptocurrency secured on a particular blockchain. It was conceived in the depths of the Global Financial Crisis of 2007-09 as a response to the perceived failure of central banks to protect fiat currencies against inflation. The overriding priority for Bitcoin was therefore to avoid coming under the control of any single interest or interest group who might choose to manipulate it to their advantage. Consequently, it was designed to be maximally decentralised and ‘trustless’, relying solely on the consensus of its participants (‘nodes’) for its operation. In the case of Bitcoin, this consensus is protected by ‘proof-of-work’ (POW), a ‘consensus mechanism’ which requires nodes to justify their participation in the blockchain by solving algorithmic puzzles. In theory, these puzzles are so complex that it is technologically and economically infeasible for anyone to dominate the consensus so as to gain control over the Bitcoin blockchain.

As a technical solution to Bitcoin’s specific demands, POW is extremely elegant but it is energy intensive and poorly scalable. It comes at a cost of significant computational effort and hardware and this cost rises dramatically as the blockchain grows, requiring an increasing investment of resources for ever-diminishing returns. POW may have suited Bitcoin’s needs in the early days but now looks increasingly unsustainable and needlessly wasteful. Nevertheless, where Bitcoin has led, other blockchains have followed. POW is often touted as the gold standard consensus mechanism but that does not make it a ‘one size fits all’ solution. The size and complexity of Bitcoin arguably necessitate the highest levels of security and decentralisation: it exists in billions of individual units and subunits which are widely and frequently traded and are highly fungible (i.e. each is indistinguishable from all others).

NFTs, by contrast, are significantly fewer in number, are traded less often and are (by definition) non-fungible, so cheaper alternatives to POW may be appropriate. Furthermore, POW may not actually be as effective as is claimed. Far from being a magic shield against overbearing centralisation, it has failed to prevent economic pressures consolidating influence over Bitcoin in a handful of mining pools. Worse still, in 2014 a single mining pool ( inadvertently achieved a critical 51% share of control, before voluntarily reducing this to 39.99% to restore trust in the cryptocurrency.

There are numerous alternatives to POW, each of which strikes a different balance between security, cost and scalability. The most popular alternative is ‘proof-of-stake’ (POS) which requires miners to demonstrate a specified holding of a blockchain’s tokens. This rewards investment of time and commitment to the blockchain and consumes orders-of-magnitude less energy than POW — perhaps as little as 0.05%, according to the Ethereum Foundation. While a POS-secured blockchain could theoretically fall under the control of a cabal of incumbent interests, the considerable cost savings can make this a risk worth taking, especially bearing in mind that even POW has not saved Bitcoin from the threat of oligopoly.

This article contains our thoughts and opinions on an issue of general interest and is written from the perspective of Australian and/or English law. It is not legal advice and is not provided in the context of a solicitor-client relationship. It may not even be relevant to your jurisdiction. No duty of care is assumed or accepted. Please carry out appropriate research and consult with a suitably qualified legal expert before taking any action or making any decisions.